Union Pacific: Buy or Sell?

Union Pacific (UNP) announced second quarter ended June 30, 2016 total operating revenue of $4.77 billion, down 12 percent year-over-year from $5.43 billion during the same period last year and slightly below $4.83 billion sequentially in first quarter of 2016.

Union Pacific Corporation declared second quarter of 2016 net income of $979 million or $1.17 per diluted share, down 19 percent year-over-year from $1.2 billion or $1.38 per diluted share in second quarter of 2015.

The global railroad company reported continued year-over-year declines in both its top and bottom lines primarily due to the ongoing weaker international commodity demand and pricing environment, eating into the company’s key margins while forcing it to cut its core capital expenditures and preserve cash.

A look at the weakness

Union Pacific is continuing to witness key declines in both the freight contribution to its top line and major pricing benefits again driven by the ongoing weaker global commodity demand and pricing environment, negatively impacting the company’s key margins.

Therefore, Union Pacific sustained an investment grade balance sheet with about $1.5 billion of total year-till-date debt issuance during 2016.

The continued commitment of Union Pacific towards improving its financial position while minimizing debt through delaying of core capital expenditures while employing core cost-saving techniques is estimated to support the company in emerging strongly from the continuing global downturn while allowing it to soon offer outstanding shareholder returns once the key commodities demand and pricing scenario recovers completely.

Union Pacific is consistently focused on delivering attractive free cash flows by targeting weaker net income, core capital investments, bonus depreciation and impressive dividends. Further, the company is uniquely executing share repurchase program for the quarter, buying approximately 7 million shares worth a total of $602 million with nearly 36 million shares still outstanding under the current share repurchase authorization.

Smart operational moves

Union Pacific successfully managed to deliver over 1.1 basis points growth in year-over-year operating ratio performance over last year and primarily driven by significant productivity enhancement efforts, keen focus on strategic resources alignment, improved core pricing somewhat offset by major volume reductions. Also, the key railroad company is focused on delivering full year operating ratio of approximately 60 till 2019.

Going forward, Union Pacific targets on strategically aligning its key workforce with overall demand, controlling the inflation expenses, minimizing pension costs, planned productivity and volume linked minimizations and training pipeline contraction. Union Pacific also achieved a notable 36% year-over-year reduction in total fuel expenses mainly due to a decline of GTMs enabled by weaker volumes and smaller average price of diesel fuel while a solid 2% improvement in consumption rate.

The superior year-over-year operational performance of Union Pacific is primarily driven by notable growth efforts of the company while consistent focus on minimizing both core and non-core expense to sustain a healthy cash position amid hugely tough global operating environment.

Union Pacific has delivered impressive network and service performance driven by suitable weather programs generating variability, varied network gains and superior focus on greater enhancements. The key railroad company is highly agile in a constantly changing global environment and thus, lowering the number of active locomotive fleets while optimizing the workforce to minimize costs. Apart from optimizing the core cost position, Union Pacific is intensely focused on improving the network productivity by uniquely aligning key company resources with performance and demand.

Conclusion

Overall, the investors are advised to “Buy” equity in Union Pacific Corporation considering the company’s significant near-term and longer term growth prospects, indicated by an attractive PEG ratio of 2.49. The profit margin of 21.48% also seems extremely impressive. However, CSX needs to optimize its debt-burdened balance sheet with notable total debt of $15.19 billion against weaker total cash position of $2.16 billion only, restricting the company to make future growth investments.